Dual Consolidated Losses  •  IVES Program  •  
PPA '06 Technical Correction Suggestions (box) • 
Late Extension Waiver Was Valid •  AICPA Financial Literacy Ads (box) • Sec. 409A's Application Deferred  • Qualifying Child Tie-Breaking Rule (box)
 

Lesli S. Laffie, J.D., LL.M.

From the IRS

Dual Consolidated Losses

On Oct. 6, 2006, Treasury unveiled a major agreement between the U.K. and the U.S. to allow taxpayers to claim dual consolidated losses ( DCLs) that otherwise would not be allowed because of conflicting legislation in the two countries. 

The agreement, the first of its kind, allows taxpayers to elect whether they want to use a loss in the U.K. or the U.S., but not both. Practitioners have said this is generous treatment, as the taxing authorities could easily have provided that the loss has to be taken in the country in which the income was primarily earned. The accord also allows taxpayers to elect to use the loss in any open tax year. 

Background: Negotiated by the two nations’ competent authorities, the accord addresses the problem of “mirror legislation” (conflicting statutes intended to prevent taxpayers from using the same loss twice in two different jurisdictions). 

The U.K.’s mirror laws effectively prevented some taxpayers from using DCLs at all. The issue has been one of the most controversial, as U.S. tax authorities work to update DCL rules under Sec. 1503(d) that are nearly 15 years old. The accord falls under Regs. Sec. 1.1503-2( g )(1). 

Eligibility: The agreement sets out a number of rules and conditions that must be met for taxpayers to make the loss election. For example, the agreement will not apply when losses are incurred by a:

• Dual-resident corporation, unless it is a U.K. permanent establishment dual corporation; 
• Hybrid-entity separate unit; or
• Separate unit owned indirectly through a hybrid separate unit. 

The use of a loss must be consistent with domestic law in the country in which the taxpayer wants to use it. Taxpayers are allowed to make only one irrevocable election per loss in a tax year. If a loss has been relieved, used or claimed following an election, no part of it may be used in the other nation inconsistently with the law of the first country. If this occurs, any loss relief given in the first country will be recoverable or recaptured. The agreement is valid through the end of 2011, unless terminated by a joint agreement of both competent authorities. 

IVES Program

According to Ann. 2006-74, on Oct. 2, 2006, the IRS began the Income Verification Express Service ( IVES) program, offering electronic delivery of transcripts and records available on submission of Form 4506-T, Request for Transcript of Tax Return. For details on participation in the program and submission of requests, including fees and payments, visit the IRS’s website, www.irs.gov ( keyword IVES). 

Under Sec. 6103( p)(2), the Service may, from time to time, prescribe fees for services provided by the IVES program. Failure to pay program fees will result in suspension from the program; any outstanding obligation will be subject to interest, penalties and administrative charges. Continued nonpayment will be subject to the Treasury Offset Program.

Submission of false or fraudulent forms or information will result in termination from the program. 

Late Extension Waiver Was Valid

In CCA 200637001 (9/15/06), the IRS ruled that a waiver to extend the statutory period of assessment for unpaid employment taxes was valid and enforceable, despite the fact that it was executed outside of the original three-year assessment period. 

Facts: A corporation had an assessed unpaid balance for employment tax for the third quarter of 1991. The IRS began a “trust fund recovery penalty” investigation in which it recommended that several officers of the corporation be assessed the penalty. The recommendation was made on the last day of the three-year statute of limitations (SOL) on assessment. On the same day, Letter 1153, Notice of Proposed Assessment, was issued and mailed by certified mail to all of the officers listed on Form 4183, Recommendation of Assertion of Trust Fund Penalty, as responsible for the penalty. 

As a result of the issuance of Letter 1153, the assessment statute was automatically extended for 90 days, giving the corporation’s officers additional time to appeal the proposed assessment. To meet the requirements, the officers had to appeal within 60 days of the issuance of Letter 1153. One of the officers responded with a protest letter that was found to be incomplete. He was notified of his right to cure the defective appeal within 45 days; however, the proper appeal was not received until after the deadline. At that time, an IRS revenue officer secured from him Form 2750, Waiver Extending Statutory Period for Assessment of the Trust Recovery Penalty. 

Overview: Sec. 6501(a) generally provides that tax must be assessed within three years after a return is filed. Under Sec. 6501(c)(4), the Service and a taxpayer can agree in writing to extend the period for assessment, as long as the agreement is entered into before the expiration of the assessment period. 

Sec. 6672 imposes a 100% penalty (trust fund recovery penalty) on “responsible persons” who willfully fail to pay over to the Service the amount of taxes otherwise due. The IRS must send a 60-day notice of proposed assessment ( Letter 1153) before making notice and demand for payment of the trust fund recovery penalty. 

Under Sec. 6672(b)(3), if a 60-day notice is issued before the expiration of the SOL, the SOL will not expire before 90 days after the 60-day notice was mailed. Form 2750 is a waiver form used to extend the SOL on assessment of the trust fund recovery penalty.

Waiver valid: The Service concluded that the Form 2750 waiver was valid and enforceable, despite the fact that it was executed outside of the Sec. 6501(a) SOL period. No legal authority barred the execution of a written agreement to extend the assessment period during the 90-day extension provided under Sec. 6672(b)(3).

Sec. 409A’s Application Deferred

Notice 2006-79 extends the effective date and transition relief for most nonqualified deferred compensation arrangements under Sec. 409A from Jan. 1, 2007 to Jan. 1, 2008. This extension does not apply to certain discounted stock options subject to backdating concerns. 

Sec. 409A final regulations are expected to be published by the end of 2006, and companies must meet the Sec. 409A requirements in good faith. 

Initial guidance on Sec. 409A, which was enacted by the American Jobs Creation Act of 2004, was published in December 2004 as Notice 2005-1 (modified in January 2005); proposed rules were later issued ( REG-158080-04, 10/4/05). ( For coverage, see Singer, “Deferred Compensation for Executives under Sec. 409A,” Part I, T TA, July 2006, p. 402, and Part II, T TA, August 2006, p. 476.)

Stock options and SARs relief: Notice 2006-79 states that the transition relief does not extend to stock options or stock appreciation rights (SARs) that: 

• Were granted for stock of companies that, as of the grant date, had issued common equity securities required to be registered under Section 12 of the Securities Exchange Act of 1934 ( ’34 Act); 

• Were granted to a person who, as of the grant date, was subject to the issuer’s disclosure requirements under ’34 Act Section 16(a); and

• Includes stock rights in which a corporation either reported (or reasonably expects to report) a financial expense due to the issuance of a stock right with an exercise price lower than the fair market value of the underlying stock at the grant date that was not timely reported on financial statements or reports for the period.